Raymond Supply,a National Hardware Chain,is Considering Purchasing a Smaller Chain,Strauss

question 9

Multiple Choice

Raymond Supply,a national hardware chain,is considering purchasing a smaller chain,Strauss & Glazer Parts (SGP) .Raymond's analysts project that the merger will result in the following incremental free cash flows,tax shields,and horizon values: $$\begin{array} { l c c c c } \text { Year } & 1 & 2 & 3 & 4 \\\hline \text { Free cash flow } & \$ 1 & \$ 3 & \$ 3 & 4 \\\text { Unlevered horizon value } & & & & 75 \\\text { Tax shield } & 1 & 1 & 2 & 3 \\\text { Horizon value of tax shield } & & & & 3\end{array}$$
Assume that all cash flows occur at the end of the year.SGP is currently financed with 30% debt at a rate of 10%.The acquisition would be made immediately,and if it is undertaken,SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level.The interest rate would remain the same.SGP's pre-merger beta is 2.0,and its post-merger tax rate would be 34%.The risk-free rate is 8% and the market risk premium is 4%.What is the value of SGP to Raymond?

• A) $53.40 million
• B) $61.96 million
• C) $64.64 million
• D) $76.96 million
• E) $79.64 million

---

Definitions:

Sexual Arousal

The physiological and psychological state of being awakened to sexual desire and stimulation.

Bulimia

An eating disorder characterized by episodes of binge eating followed by inappropriate purging behaviors to prevent weight gain, such as vomiting or excessive exercise.

Self-Induced Vomiting

The intentional act of vomiting, often used as a harmful method to control weight or relieve discomfort from overeating.

Obesity

A medical condition characterized by excessive body fat accumulation, increasing the risk of health problems like heart disease, diabetes, and high blood pressure.